Daily Rundown: March 13

J.D. DURKIN: A very good Monday morning, members, one-and-all. Chris Versace and I are now back to get ready for the week ahead, and it will be a busy one. We certainly have our work cut out for us with the collapse of Silicon Valley Bank, but first, of course, let's start with a recap of last week. Chris, since it's our first time chatting since last week's live call, talk to me about any highlights for members watching now that may have missed it.

CHRIS VERSACE: I think the biggest thing that we did on the March Members-Only call was really roll up our sleeves, dig deep into the AAP rating system and talk about how we formulate our price targets for the various positions in the portfolio. And I would encourage, members, if you missed that broadcast, and you have questions about the AAP rating system, how we use it, how we think about it, I would really encourage you to go back and either watch the replay or please read the transcript.

J.D. DURKIN: And if you didn't miss the call, never fear you at home, you could rewatch the full hour by heading on over to the AAP Home page and clicking on the Video tab there to Chris's point. And, of course, our favorite question, Chris, is there anything from last week that you wish you could change or do differently?

CHRIS VERSACE: I don't think there really is. It was a-- let's say call it an interesting week. The beginning kind of unfolded the way we thought it would with comments from Fed Chair Powell. But, obviously, Silicon Valley Bank and what's happened since then, I won't say that it was out of the blue, totally unexpected.

There were some warning signs that were out there. AAP member Doug Kass, in particular, writing about this, but we didn't do any action with the portfolio late in the week. And I think that was the smart move. And I think that's what we're going to continue to do here in the very near term, as I'm sure we'll talk about. We've got a very busy week ahead of us, J.D.

J.D. DURKIN: We certainly do. So let's now move to the news. I'm sure we'll be talking about for some time to come. That's, of course, the fallout after SVB and its collapse, the first bank failure, Chris, since the 2008 GFC. As headlines continue to filter in, what are you most closely following?

CHRIS VERSACE: Well, it's really going to be the fallout. Over the weekend, we learned that there's some backstopping efforts really to help depositors, but when we step back and we really think about Silicon Valley Bank as an institution, what its role was in early-stage companies, what we think about the venture capitalists that had banked there, had funds there, there will be ripple effects.

And let's remember too that Silicon Valley Bank, as we learned over the weekend, it's not the only bank that's likely to have problems. Signature Bank was closed over the weekend. There are others out there dealing in the venture debt market. So you know, my big concern here is, what's the next shoe to drop? More likely there will be one then not.

So we're going to have to kind of tread very carefully here as the market really digests this. I also think we're going to see some questions raised about bank profitability, bank earnings. We don't have a lot of exposure there today. Perhaps if we see some of the quality banks pull in, that could be something that we look to slowly carefully wade into, but the next couple of days, especially ahead of all the inflation data, we're going to get we're going to be very, very prudent, very careful, and very pretty much on the sidelines for now.

J.D. DURKIN: And so you mentioned their exposure a moment ago. To clarify, does the portfolio have any direct exposure?

CHRIS VERSACE: That's a great question. And I'm sure a lot of members are saying, well, what about ChargePoint or some of these other names that we have in the portfolio? I'm happy to say that after reviewing ChargePoint's 10k's and other filings, it doesn't appear to have any exposure to Silicon Valley Bank or Signature Bank.

More importantly, let's remember, it doesn't have any debt at the end of 2022. So the risk of any major impact on ChargePoint is low. The one area that we really do have to do some additional work on is going to be in the cyber ETF, just because of the basket of cyber securities, there's roughly 40 in there. So we are kind of rolling through that, trying to understand the degree of exposure, but remember too, the cyber ETF is rather diversified. So no one company with great-- should it have great exposure, I should say, to Silicon Valley Bank is really going to upset the apple cart.

J.D. DURKIN: You recently took a look at a bullpen name in Trinity Capital. Chris, you anticipate taking any action, or are you in a wait-and-see mode right now?

CHRIS VERSACE: Well, we're going to be in a wait-and-see mode. And I say that because in reviewing all the companies with exposure to the venture debt market, Trinity Capital is certainly in that mix. And as I pointed out in that note to members on Friday, when you look at the valuation, yes, you could make the argument that, wow, prior to Silicon Valley Bank, this was an arguably cheap stock, and we could potentially see some nice dividend income as well. However, given the issues that led to Silicon Valley Bank trying to recap itself with that offering, which, of course, didn't get done in the subsequent fallout, this is going to be one that we put back on the bench for a little time until we have more clarity as to what Trinity Capital exposure might be.

J.D. DURKIN: And finally, Chris, as we mentioned a bit earlier, it's the first time since we've seen a bank-- that we've seen a bank failure like this since the Great Recession. Any final pieces of advice for our members watching at home?

CHRIS VERSACE: So not so much on the banks, per se, but what I would say is this. We have seen a demonstrative shift in expectations what the Fed is likely to do at their March meeting. Now we have to think about what the Fed's mandate is, maximum employment, stable prices.

You know, what does that mean relative to what we saw unfold over the weekend? You know, my suspicion is that the Fed is likely to treat this as a very isolated incidence and really focus on its core mandate. As we know, inflation has been persistent, sticking around at higher levels for far longer than expected.

My guess is that we will see that, again, in the data. And I say that with the February CPI, the February PPI coming Tuesday and Wednesday respectively. If it shows exactly what we've been seeing in recent data, I think the market is going to be very, very volatile. It could potentially whipsaw even further down to the downside.

I say this because right now as we start the week off, the CME Fed Watch tool is sharing that, you know what, that 50-basis point rate hike that we thought we were going to get at the end of the March, off the table, and it's looking increasingly like a 25-basis point rate hike. But again, we don't have that data in hand yet. And that could be the tipping point. So, again, it's another reason for us to just lay low over the next couple of days until we have a lot more data in hand. And as we get that data, we'll have a much better sense as to what the Fed is likely to do. We'll also have a little more clarity on the fallout from Silicon Valley Bank.

J.D. DURKIN: Lay low, wait and see. Keep it cool for just a few days with a lot of busy data points ahead of us for us all to eagerly examine. Thanks for that, Chris, and thank you all, members, watching at home. We'll do this again soon. We'll see you then.